27 April, 2012


Legal News & Analysis – Asia Pacific


Assessing recent political changes

Since mid 2010, and particularly since Mr Thein Sein became civilian President-elect, signs of political change in Myanmar have become frequent. In response, there has been a surge of official overseas visitors to assess steps towards democracy, including a recent visit by the British Prime Minister David Cameron. Whilst there have been cycles of opening-up and repression since military control was established in 1962, it should be remembered, on the positive side, that other Southeast Asian nations have also made effective transitions from military to civilian rule. Members of ASEAN have, given their proximity and aligned economic interests, been eager to encourage Myanmar, offering the enticement of the chairmanship of ASEAN in 2014 if satisfactory progress towards democracy is achieved. Recently, Japan has also agreed to write off more than £2.3 billion of debt owed by Myanmar and to resume development aid.
Potential attractions of Myanmar as a long term investment destination
·         For natural resources: Mining is the leading sector, but oil, gas, gems and timber are also important. These sectors are the most likely areas of expansion in the short term. Chinese and Thai firms are already very active in these areas and associated infrastructure, such as the Dawei port and other Special Economic Zone projects.  In the upstream gas sector, Thailand's PTT Exploration and Production (PTTEP) and Daewoo International are currently the largest players, but other companies such as Total, Chevron, ONGC and Petronas also own significant interests in major projects. It was reported in early January 2012 that Myanmar had awarded 10 onshore oil and gas blocks to eight companies in its biggest energy tender in recent years.  The winners of the onshore blocks were reportedly mostly from Asia, including PTTEP and Petronas. Offshore, Myanmar recently reached an agreement in relation to a dispute with Bangladesh over their maritime claims in the Bay of Bengal (in relation to which Herbert Smith has advised), following a United Nations ruling through the International Tribunal for the Law of the Sea on 14 March 2012.  Myanmar is now offering nine offshore oil and gas blocks to the market;
·         As a consumer of infrastructure: Transport facilities, urban development and hydroelectric projects are possible recipients of intergovernmental aid;
·         As a low-cost manufacturing location: Once infrastructure improves; and
·         As a substantial domestic and consumer market: Myanmar's population is estimated to be about 56 million (compared to 87 million in Vietnam and Thailand's 69 million).
Myanmar's foreign investment policy and legal framework
Since the March 2011 regime change, the Myanmar government has been actively courting foreign investment.  The main foreign investment laws currently in force are:
·         The Foreign Investment Law (1988) (FIL), which governs foreign investments in general;
·         The Special Economic Zone Law (2011) (SEZL), which governs foreign investments in Special Economic Zones; and
·         The Dawei Special Economic Zone Law (2011) (DSEZL), which governs foreign investments in the Dawei Special Economic Zone.
Under the FIL, foreign investors are permitted to carry out all economic activities, with the exception of 12 types of activities that are reserved for state ownership under the State-Owned Economic Enterprises Law (1989) (SOEEL).  These prohibited economic activities include, among other things, oil and gas exploration and production, mining, electricity generation and banking services.  However, under the SOEEL, the Myanmar government is empowered to grant certain exemptions by way of notifications to enable foreign investment in these prohibited areas.
Foreign investors to whom the FIL applies can also benefit from certain exemptions and reliefs in relation to income tax (for three years) and customs duty.  The FIL, SEZL and DSEZL also contain state guarantees against nationalisation, and the FIL confers rights to foreign investors in relation to the repatriation of profits.  However, a key point to note is that exemptions and reliefs are granted on a case-by-case basis. 
New foreign investment laws
A new foreign investment law is expected to be passed during the next Parliamentary session in May or June, and reportedly (according to Reuters) includes, among other things, an extension to the income tax exemption / relief from the current three years to five years, and an obligation to increase the percentage of local skilled workers to 25% after 5 years, 50% after 10 years, and 75% after 15 years.   The SEZL is also reportedly under review and is planned to be redrafted.  However, it is uncertain whether the new laws, particularly the new foreign investment law, will in fact introduce a significant change to the existing laws.  Furthermore, the National League for Democracy, the main opposition party led by Aung San Suu Kyi, has also boycotted the current session of Parliament over the wording of the oath of office for members of Parliament, which may have an impact on the passage of the new laws.
In this regard, the key point to note is that the existing foreign investment law provides an adequate starting point and, it is believed that the new laws will not be fundamentally different.  What is changing in Myanmar is the potential willingness to apply the investment laws and encourage foreign investment.
Risk management is essential
Those interested in Myanmar need to be aware of the operational and legal risks of commercial involvement in or with Myanmar.
Transparency International currently rates Myanmar as 180 out of 183 countries as assessed by its 2011 Corruption Perception Index of public sector corruption. Interests affiliated to the military control many enterprises, and the privatisation policy of 2010 is said to have resulted in an expansion, rather than a reduction, of such control.
For any enterprise operating in Myanmar, extreme care is required with respect to bribery and money-laundering. As well as the risk of damaging international publicity and breach of the OECD Anti-Bribery Convention, such businesses and their parent companies should also consider the Foreign Corrupt Practices Act (US, 1977) and the Bribery Act (UK, 2010).
Legal system and courts
Myanmar's legal system is complex and outdated.  It is based on a confusing combination of:
  • colonial period laws (pre 1948);
  • Parliamentary laws (1948 – 1962);
  • Revolutionary Council laws (1962 – 1974);
  • People’s Assembly laws (1974 – 1988); and
  • State Law and Order Restoration Council / State Peace and Development Council laws (1988 – 2011).
These laws sit over the backdrop of a common law system dating from the British colonial period, now supplemented by modernising laws and regulations implemented by the new government.
This complex system presents an obvious challenge for foreign investors, yet the experience of Herbert Smith is that the legal regime can be negotiated effectively so as to provide clients with solutions that are in compliance with law, although this can entail constructive dialogue with the authorities.
Where legal rights have to be enforced or contested, the overwhelming preference for foreign investors is to choose arbitration.
Arbitration is also not straightforward, although it remains preferable to the courts.  Arbitration within Myanmar – often pushed by Myanmar parties during contract negotiations – is subject to the Arbitration Act (1944) which is outdated and inefficient and contains provisions which may surprise and disconcert foreign parties.  International arbitration outside Myanmar is greatly preferred, but it is important to recognise that it may be difficult to enforce any award within the country.   Myanmar is not a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1959), although there has been some recent debate within the government about becoming a signatory.  Unless that happens, the Arbitration (Protocol and Convention) Act (1939) will apply and effective enforcement of foreign awards in Myanmar is likely to be difficult in practice.
It is also possible that a Myanmar counterparty with government or military links might assert sovereign immunity even in the face of a prior commercial agreement not to assert such immunity.
As regards investment protection, Myanmar is not a signatory to the ICSID Convention (1965) but it is a party to the ASEAN Investment Protection Agreement (1987) and its successor (not yet in force), the ASEAN Comprehensive Investment Agreement (2009).  Under the 1987 ASEAN Agreement, one claim was brought against Myanmar, albeit unsuccessfully (Yang Chi OO Ltd v Myanmar (2003)). Myanmar has concluded very few bilateral investment treaties (it is understood that Myanmar has three BITs in force with China, the Philippines and India; BITs have also been signed with the Lao People's Democratic Republic, Thailand and Vietnam, but these are not in force), and those treaties may not provide effective legal redress for aggrieved investors.
In summary, investors should: (i) try to avoid using Myanmar law where possible; (ii) push hard for disputes to be resolved by an arbitral tribunal rather than by the Myanmar courts, (iii) push hard for international arbitration, even bearing in mind that enforcement of a foreign arbitral award in Myanmar may be difficult, and (iv) consider structuring deals in a way which brings the investment within the scope of Myanmar's investment treaties.
Sanctions are of particular concern to European and US investors from a legal perspective, but even investors from jurisdictions without sanctions against Myanmar should be aware that involvement in sensitive sectors could generate international criticism. This issue should be managed in line with corporate ethics policies. Currently, sanctions are imposed by the US, Canada, the EU and Australia, which may also affect any planned exports out of Myanmar.
The EU sanctions have included an arms embargo, bans on non-humanitarian aid, on imports of and investments in timber, gems and metals as well as various investment restrictions. France has worked to ensure that oil and gas investment is not subject to sanctions. The US has had a more rigid line than the EU on sanctions historically and has banned new investment in Myanmar since 1997.
However, in response to Myanmar's rapid political reform and the recent outcome of the 1 April by-elections, the EU, US and Australia have suspended / lifted or are considering suspending / lifting some of their restrictive measures against Myanmar.
The US, for instance, will now allow financial transactions in support of certain humanitarian and non-profit activities, and Secretary of State Clinton has recently stated that the US intends to lift the visa ban and some aspects of the investment and financial restrictions.  However, there is no timetable for this, and the US Department of State has not indicated whether it intends to remove the sanctions completely or merely permit specific conduct that would otherwise fall within the restrictions.
The EU also suspended its admission restrictions concerning 87 Myanma persons in February 2012, and following a meeting of EU foreign ministers on 23 April 2012, has now suspended the majority of its current sanctions (with the exception of its arms embargo which it will retain).  In its decision, the Council stated that it would monitor closely the situation on the ground, and keep its measures under constant review.  The Council also welcomed European companies exploring trade and investment opportunities to contribute to the development of Myanmar.
Organisations considering making an investment into Myanmar should determine how best to limit risks by looking at the best investment structures, international arbitration clauses and by including appropriate contractual protections.

For further information, please contact:


Alastair Henderson, Partner, Herbert Smith

[email protected]


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